How to Make Millions By Doing Nothing

Fascinating article in today’s Times by Richard Sandomir about how the owners of the old American Basketball Association team the St. Louis Spirit are still being compensated for an agreement forged in 1976, when the Spirit were excluded from joining the NBA. Those owners, Ozzie and Daniel Silna, were given a share — in perpetuity — of future TV revenues:

In 1980-81, the first year the Silnas were eligible to get their share of TV money, they received $521,749, according to court documents filed by the N.B.A. For the 2010-11 season, they received $17,450,000. The N.B.A.’s latest TV deal, with ESPN and TNT, is worth $7.4 billion over eight years. Soon, the Silnas’ total take will hit $300 million. …

Donnie Walsh, the president of the Indiana Pacers, said in 2003 that discussing the Silnas’ deal “puts a dagger in my heart,” reminding him of losing that one-seventh share of TV money each season. On Thursday, he said he preferred not to talk about it.

How is this rent seeking? They were compensated by the original contract to merge the leagues, and didn’t try to manipulate the political environment for their payoff.

It’s more an example of a bad, bad miscalculation on the NBA’s part about future television revenues. For the NBA of 1976, this may not have been a gross error; who would have predicted the prominence of TV basketball a decade and a half later?

This is perhaps most similar to the case of Jeanne Calment and Andre-Francois Raffray, where the latter bought her apartment when she was 90 years old, paying her $400/month with the agreement that he’d take over the property when she died. Unfortunately for him, she turned out to be one of the longest lived human beings. “Mr. Raffray died a year ago at 77, after paying Mrs. Calment more than $180,000, better than double the apartment’s market value. His family was still paying when she died.”

Good catch on the math in the article. On the other hand, there are no details on the original purchase contract. It’s very possible he paid some lump sum at the beginning (i.e., she likely wouldn’t have sold the apartment with the possibility that she’d die after the first month, and only receive $400 for the property).

It’s still rent-seeking. Maybe it wasn’t rent “seeking” at the time, but its clearly rent receiving now.

I assume you agree that they aren’t actively doing anything that adds value correct? The fact that someone in the past signed a stupid contract doesn’t change the nature of present productivity.

The simple facts are that they tried to join the NBA, but were not allowed. As compensation in order to make them “go away”, someone wrote a stupid contract that gave them eternal free money for doing nothing.

I don’t blame them for taking the deal, obviously, but the reality is that they are being paid huge amounts of money for doing nothing. This is, ultimately, no different than welfare.

They aren’t doing any work, they aren’t creating any value. This isn’t compensation for a contribution. It’s a rent.

Clearly the income they get is a product of the value created by the active workers and managers in the NBA, some portion of which is grafted off and given to the Silnas. That’s just the facts.

The fact that this is done via a legally binding contract doesn’t change the fact that the Silnas aren’t actually “earning” their income.

No, rent seeking has a particular technical meaning which this case doesn’t meet at all. If they had manipulated the government to force the NBA to sign this contract, then, yes, then their efforts would be rent seeking. But there’s no indication they did that: the NBA voluntarily signed a contract in which they did not correctly anticipate the future value of TV revenues.

What they do with the rents they’re receiving from the NBA is their business. They can invest it wisely or stupidly (e.g., they gave a hunk to Bernie Madoff), but this flow of cash is an outcome of the contract voluntarily signed between private entities, without manipulation of the political environment. I would not call them particularly clever; they merely lucked out, like a property owner discovering oil underneath his land, and receiving royalties from Exxon when the latter extracts it.

cjc: Whether or not the government “forced” them to sign the contract is irrelevant, and anyway, government “force” is still a part of the deal, because it is only due to government force that the contract is still being honored. Without a legal system backed by government police force, obviously there would be no way to enforce contract law.

But anyway, that’s not the point. I’m not disparaging the Silnas for accepting the offer. Obviously anyone would accept free money without having to work for it, and anyone should if they can get it.

But the fact remains, this is income they are receiving without having to work for it, that’s a fact.

It’s fact that the income is a function of the revenue generated by the business, to which they make no contributions and have never made any contributions. That’s a fact.

If NBA revenue goes up, their income will go up, even though they do nothing at all to contribute to its rise. Their income is a product of taking a slice out of the pie, a pie that is being created by other people, that’s a fact.

What their income is, is like 10 people working a kitchen making a large pie while the Silnas sit on the couch and watch. At the end of the day, the Silnas come in and take the first slice, and the amount of pie that everyone else who made the pie gets is reduced by the amount that the Silnas take out.

The size of the Silnas’ piece grows or shrinks in proportion to how big the 10 other people make the pie. As they make bigger and bigger pies, the Silnas get bigger and bigger pieces, even though all they do is sit on the couch all day long every day.

As was said, its good “work” if you can get it.

It is graft, it is welfare, it is rent-seeking. The non-productive people are taking a piece of the value created by the productive people, that is a fact of this matter. Of course, the NBA itself is a massive rent seeker as well, since much of their revenue is propped up by tax-payer funded capital in the form of tax funded arenas, tax subsidized communications infrastructure, and the tax subsidized “farm team” system known as public high school and public universities, so really a good portion of the income that the Silnas get is graft from tax payers like you and me as well.

I wonder if the NBA couldn’t escape this by instead selling media rights or something. The ongoing shift to Internet might also end the deal. Wonder if lawyers on both sides have looked at the language in the original agreement for wiggle room.

This post is mistitled. The Silna’s aren’t “making” millions, they are reviving millions. The title of this post should have been “How to Get Millions For Doing Nothing”.

Clearly the Silna’s are not creating any value, they are making no contributions at all. The income is pure graft.

You would think that at a place like Freakonomics you wouldn’t conflate what you clearly recognize as rent-seeking with productivity.

I consider misuse of the term “making” money, etc. to be one of the biggest problems in American economic vocabulary, as it immediately blurs the difference between actually creating value and simply appropriating it, and this is especially problematic at a time when rent-seeking accounts for such a significant portion of the incomes of the super-rich…

Not rent seeking at all. They’ve made $300MM over 30+ years. Now tell me how much money they’d have made had the St. Louis Spirit joined the NBA! Probably quite a bit more, and more securely, as TV revenues may fall over the coming decades.

This is not rent seeking in the least – the NBA simply paid an agreed upon price to compensate the Spirit for giving up their franchise.

This isn’t so different from the extension of copyright in recent history. A long time ago it was 50 years after the authors death, now its up to 95 years(!!) for some works.http://www.copyright.gov/circs/circ15t.pdf . The beneficiary is not necessarily the creator.

There is very active bootlegging of copyright protected content and that includes TV sports events that are streamed illegally on the web thus bypassing the revenue stream of the NBA.

Cases like the Silnas gain make it harder to appeal to fairness in paying for copyright protected content. I am guessing most people who steal content justify it to themselves by saying it only takes away a little from very rich people who have done nothing to earn it. In the case of the Silna’s they would be correct.